Risk Management for MFIs - I

Risk management in microfinance is complex because of the absence or near absence of traditional risk mitigation mechanisms like collateral and guarantees, as well as the high volumes of cash transactions conducted in remote locations. Moreover, many MFIs are mission-driven organisations, and therefore prone to strategic and political risks that are unique to them and the clients they serve. As MFIs continue to grow and expand, serving more customers and attracting more mainstream investment capital and funds, they need to strengthen their internal capacities to identify and anticipate potential risks, and thus to avoid unexpected losses and surprises. This note focuses on understanding the risk function and its difference from internal audit. It also looks at different types of risks, as well as understanding some basic risk terms, risk identification and risk prioritisation.

Comments

Risk management is indeed a complex phenomena when guarantee & collaterals are missing. Besides that there are internal & external risks for MFIs. The internal risks operational, credit, internal controls so on & so forth can be to an extent controlled by an MFI, however, it is beyond the capacity to control external risks especially those pertaining to political & regulatory risks which can lead to reputational risks thus hampering/damaging the work of MFIs specifically when they are operating in Not For Profit sector. Other stakeholders & competitors are not pushed to be involved in policy advocacy on this front.